Sunday, November 4, 2012

Why I'll Never Buy Real Estate Again

Why I’ll Never Buy Real Estate Again

The American economy was derailed by the 2008 real-estate market-crash, and the recovery has limped along since then.  Unfortunately the root-causes are still in place and the damage continues.  Don’t expect the real-estate market to recover anytime soon.   Until then – buyer beware!

After my “fire baptism” in the world of real-estate I’ve decided I’ll never buy again because I can’t accept the risk of a title that’s perfectly legal but not worth defending.  The chain-of-real-estate-title is tainted by a combination of irresponsible-borrowers and reckless-lenders (mainly the mega-banks) that won’t do a thorough title-search before lending their money.  Lending-standards have tightened since 2009 but the fundamental problems remain.

In 2012 I wanted to start a tree-nursery operation in the state of Kentucky by purchasing 1 acre of rural-property near the Cumberland National Forest.   It was well-situated for my purpose at a cost of $3,500.  I hired a real-estate attorney.   His title-search at the county-courthouse showed the current-owner/seller did not have a clear-title to the land though his legal-deed showed rightful-ownership.  The property’s history explains why.

Incomplete Title Work in 2001
In 2001 the 1-acre property was subdivided from a tract of land that was originally more than 100 acres.  Out of ignorance the large-tract-owner did not revise his deed for the piece that was subdivided, and he saved a trivial sum of money.   The 1-acre property-owner recorded his deed at the county-courthouse.

Defective Loan in 2001
After the sub-division-transaction the 100-acre owner borrowed money from Countrywide Real Estate with a “liar loan.”  He submitted his original “unrevised” property deed that included the subdivided-property as collateral and he borrowed more money than the property was worth.

Due Diligence Failures 2001 - 2006
Countrywide did a title-search from their location in another state -- meaning they did not go to the county-courthouse.  Countrywide folded in a national real estate scandal and Bank of America took over the loan.  They did their title search from Dallas, Texas.  They didn’t hire anyone to research the county-records at the courthouse.  Their title-information was no better than Countrywide’s, and they used the “unrevised” deed as collateral for the loan.

Property Foreclosure in 2009
In 2009 the 100-acre-land-owner foreclosed on his property including the house that he lived in.  He ceased making his payments. 

Mega-Banks don’t do “Real” Title Searches
I entered the picture in April of 2012.  Posing as a potential customer for a mortgage loan on the property, I discussed the title-history with a BAC loan-officer.  I asked why they didn’t hire an attorney to review records at the county-courthouse before they made loans.  He explained -- BAC has an umbrella title-insurance-policy that covers all the good along with the bad real estate properties, and they pay a fortune for it.   As long as the customer makes payments they don’t really care.

Bankruptcy Proceeding in July 2012
In July 2012 BAC launched a lawsuit against the100-acre property-owner. The entire property will go up for auction including the 1-acre tract rightfully owned by the third party who offered it to me.  It will cost more than $10,000 to defend a piece of property worth $3,500 – obviously a loss.   I lost about $1,000 on the surveying costs and legal fees.  The third party will lose his one-acre property. The 100-acre landowner loses his property and residence.  The land is worth less with poor title-work – hence the county will lose on property-taxes.  The state and federal government lose tax-revenue on a small-business start-up that never happened.  Even the bank loses – they won’t fully recover the loan.  In short - everybody loses.

A small real estate buyer can’t afford the risks that banks routinely absorb, and title insurance does not solve the problem.  This drives down property values.  It’s little wonder that the real-estate market is feeble and that our local, state, and federal governments are having money problems.